Hello. India’s finance minister Nirmala Sitharaman announced the Modi-3 government’s federal budget this morning; we’ll outline what you need to know. Then we’ll explain why Indian equity multiples are so high, and then close with Gupshup, a round-up of the most important headlines from the week.

BTW: India is rich in cultural traditions, yet few make it to the UNESCO list of Intangible Cultural Heritage of Humanity. In 2023, one tradition was added— which one was it? (Answer at bottom)

Markets

Quick Appendix: NFTY is a weighted average of the largest 50 companies listed in the National Stock Exchange of India by market capitalization. FLIN, or Franklin TSE India ETF, tracks large and mid-cap companies, weighted by market cap, to give international investors exposure to Indian markets. MSCI EM is an index that captures large and mid-cap companies across 24 emerging market countries and covers 85% of the free float-adjusted market capitalization in each country. SP500 is the index of the 500 largest companies listed in U.S. stock exchanges by market cap. MSCI India is an index that covers 85% of the Indian equity universe.

2024-2025 Indian Budget Announced

India will spend $580 billion (48.2 trillion rupees) in the 2024-2025 financial year, an 8.55% increase from the previous year. The budget will be financed by the expected $460 billion (38.4 trillion rupees) in gross tax revenue in 2024-2025, a 14% year-over-year increase driven by economic growth, and a 4.9% of GDP fiscal deficit, declining from 5.6% of GDP in 2023-2024. The RBI also gave the government a record-high dividend of $25 billion (2.1 trillion rupees); the RBI gives an annual dividend to the Indian government from money earned on securities and investments. This year, the Indian government will be able to spend more while borrowing less.

Taxes: India will be reducing its corporate tax on foreign companies from 40% to 35% in a bid to lure FDI. This is still steeper than the corporate tax rates on domestic companies, which is 30% for large companies and 25% for companies earning less than $120,000 (10 million rupees), reflecting India’s protectionist tendencies.

Taking on Day-Traders: India also increased taxes on short-term equity holders and derivative trades, reflecting how uncomfortable the government has been with the explosion in derivative trading that has taken place in India recently. In May of 2024, Reuters reported around 80% of global derivative trades were taking place in India; the notional turnover (sum of the value of the underlying assets in derivative trades) in the National Stock Exchange increased more than four-fold since May 2022 to its peak in 2024.

Thus, the capital gains on stocks held for less than one year will increase from 15% to 20%, while taxes on stocks held for more than one year will increase from 10% to 12.5%. The tax on security transactions increased from 0.0125% to 0.02%, and the tax on options has increased from 0.0625% to 0.1%, making day trading twice as costly. 

This will negatively impact short-term market sentiment while bringing more gravity to equity valuations.

Positive for credit ratings: Investors widely see India’s declining yearly fiscal deficit, which has come down every year since 2021’s 9.2% of GDP, as a crucial step in India embracing fiscal responsibility, as the country aims to improve its sovereign debt credit ratings. S&P currently gives Indian debt a BBB- rating with a stable outlook, while Moody’s puts it at Baa3 with a positive outlook.

Budget Breakdown:

• $23.9 billion (2 trillion rupees) on boosting jobs. As discussed in previous Samosa Capital editions, India faces an unusual job crisis, where despite having a low unemployment rate of around 3% (likely in of itself underreported), it has severe underemployment — low-paying peon jobs that do not require a high school diploma routinely receive applications from lawyers, doctors, and people with doctorates.

  • Unemployment was the foremost concern for young voters in the election

  • FM Sitharaman announced numerous business and job incentives to spur employment

• $7.45 billion (624 billion rupees) to projects in Modi’s key allies states

  • $5.66 billion (474 billion rupees) to expand the southern state of Andra Pradesh’s state capital, which is governed by Telugu Desam state that rose as an ally in recent elections to preserve Modi’s majority

  • $1.79 billion (150 billion rupees) in financial aid to the northern state of Bihar, governed by the Janata Dal (United) party, another ally of Modi.

• $130 billion (11.1 trillion rupees) on infrastructure, the highest expenditure, more than a three-fold increase since the 2018-2019 budget, and a significant hike from the previous year’s $110 billion (9.5 trillion).

• Defense remains the second highest expenditure, at $74 billion (6.2 trillion rupees)

• $32 billion (2.66 trillion rupees) for rural development, mostly in the form of cost-of-living subsidies

• Food subsidies, welfare, education, interest payments, and home affairs (operating railway, civil service, etc) will take up most of the remaining budget

Why Are Indian Equities So Expensive?

On the heels of India’s tax hikes on equity trading, aimed to hamper $2 trillion added to Indian market caps in just four years — the fastest ever — it is worth investigating why India’s stocks keep rallying so much. India’s indices are now worth over $5.5T,  the 4th largest in the world, a point of pride and concern for policymakers.

Overall, Indian equities trade at a forward P/E ratio 80% higher than other EM equities, and 10% higher than U.S. equities, making them among the most expensive stocks in the world. Some specific industrial and consumer companies especially standout: Adani Enterprise boasts a staggering P/E ratio of 109.68, Tata Consumer Products has a P/E ratio 102.27, and Nestle India’s is 83.84 (as of COM July 23); these are more than triple and quadruple the multiples U.S. tech companies typically trade at.

Why?

Fundamentals are good, but not great:

• Return on equity and realized growth rates have been skyrocketing with the last 5 years averaging 14%.

• India, even in a high rate volatile environment, is projected for 6.8+% growth this year. This has boosted small and mid cap stocks considering the growing housing market and digital infrastructure boom. 

• Multinational companies like Hyundai and Cadbury are listing with high capital raises drawing in more speculation and demand.

• However, the valuations of many companies grow despite falling revenue. 300 Indian companies had declining revenue for two consecutive financial years, yet 216 of their stock prices rose in the last 12 months, as per CNBC.

Retail Investors are bullish: 

• Kotak Institutional Equities has called Indian stocks highly overvalued and argues it is driven by the “extreme euphoria” of retail investors

  • Retail investors have been forking up more of their money into stocks, with 2% of households investing in 2011 to 17% in 2023.

• Systematic Investment Plans (SIPs) have also become drivers of high valuations. In recent years, SIPs, which are programs that automatically take cash from an individual’s account and invest it into mutual funds, have become hugely popular.

  • This causes a steady inflow into mutual funds that are limited by their mandates on how much cash they can hold — as a result, major funds are forced to pour money into stocks with less attractive valuations

  • “[SIPs] have driven the upsurge in the Indian stock markets,” Jefferies’ head of India research, Mahesh Nandurkar, told CNBC.

  • In just May 2024, 5 million new SIPs were registered

Systematic limitations force more money into Indian equities:

• Retail investors are limited by the supply of shares. 

  • 45.1% of India’s p publicly traded companies have more than 50,000 individual shareholders, a figure that’s doubled in the last 10 years

  • 55 companies have more than 1 million individual shareholders; 10 years ago, just seven did

• Mutual funds have a $7 bn industry aggregate cap on investing in overseas equities, meaning that the ballooning of inflows into mutual funds in recent years has nowhere to go but to get piled into Indian equities. Indian mutual funds have a collective AUM of $738 billion.

  • RBI has not raised this cap in two years

• Similarly, individuals in India are capped at investing $250,000 in overseas equities per year. While this affects only a small number of highly wealthy Indians, it forces hundreds of billions of dollars of wealth further into Indian equities

RBI institutes these caps to limit Indian money from leaving the country, which protects the stability of the currency. However, rather than the Modi government hiking taxes to bring gravity to stock valuations, which only erodes the wealth of investors and forces them to buy higher volatility stocks to cover higher costs, they should make it easier for individuals and mutual funds to buy foreign equities so that Indian stock valuations have to be justified against cheaper stocks abroad. Similarly, as readers of Samosa Capital are astutely aware, Indian regulators don’t make it easy for foreigners to buy shares trading on the NSE or BSE, further insulating Indian stocks from reality. Liberalizing financial markets will let some air out of Indian stocks while poising their companies for healthy long-term growth.

Macro

India Ministry of Finance Forecasts 6.5% to 7% GDP Growth In YE March 2025 (BBG)

• Lower than the previous financial year’s 8.2% growth, and RBI’s forecast for 7.2% growth this year

• Uncertain rain patterns in part drive tempered growth expectations, as India’s economy is heavily agriculture-based and dependent on a bountiful monsoon season

India’s Chief Economic Advisor Makes Case for Removing Ban on Chinese Investment (BBG)

• Since 2020’s deadly clash between India and China, Prime Minister Modi has maintained a ban on Chinese financial investment, banned hundreds of digital companies including TikTok, and slowed Chinese immigration into the country.

• Chief Economic Adviser to the Government V Anantha Nageswaran argues India will need Chinese investment to become a manufacturing hub, saying “To boost Indian manufacturing and plug India into the global supply chain, it is inevitable that India plugs itself into China’s supply chain.”

Reserve Bank of India Sells $406 Million of Bonds To Remove Excess Cash in Banking System (BBG)

• Inclusion of Indian bonds in JP Morgan EM Index caused a flurry of bond sales from banks to foreign investors, which increased cash reserves in the banking system

• RBI aims to reduce cash levels to maintain its 6.50 percent target interest rates, which it said will not be reduced soon due to the higher-than-expected food inflation prints

• RBI has also bought up foreign inflows into India to maintain currency stability, which weakened last week due to strengthening U.S. dollar

Citi Banker Predicts India Will Attract $100 Billion in Investment, Largely to Achieve Net-Zero Climate Goals (BBG)

• PM Modi has long tried to lure investment into India for his 2070 net-zero pledge, which includes $1 trillion invested in solar panels

• Citigroup banker K Balasubramanian believes India is catching the attention of Middle-Eastern sovereign funds looking to invest in its energy capabilities and U.S. companies looking to invest in technology

88% of Sovereign Wealth Funds and Central Banks Plan to Increase Exposure to India (BBG)

• In the survey conducted by Invesco, respondents manage $22 trillion in assets

• Two-thirds of respondents forecast EM returns meeting or beating DM returns

Remittance to India to Grow by 3.7% in 2024 to $124 billion (Economic Times)

• India receives the most remittances of any country, and the total figure is likely significantly underreported, from its large emigrant population

Equities

India Raises $21 Billion in Block Trades YTD (BBG)

• BTW: Block trades are large privately negotiated security transactions carried out by financial institutions and done mostly to limit the stock’s publicly traded price

• This is largely caused by large corporations selling parts of subsidiaries to raise funds

  • For example, Vodafone sold 18 percent of Indus Towers to raise $1.8 billion

• This is a strong sign for financial markets, as block trades signal optimism from buyers while giving sellers liquidity to finance investments

Suzuki Motor Corp EVP Predicts India’s Car Market Will Hit 20 Million Units by 2047 (BBG)

• Maruti Suzuki, the Japanese car company’s India subsidiary, aims to capture 50% of the market by 2030

  • It currently has a 40% market share in Indian automobiles (Spinny)

Domestic Indian Funds Sold Equities to Hedge Against Volatility Ahead of Budget Announcement (BBG)

• Largest sell-off, nearly $500 million total, in six months

Alts

InMobi PTE, a mobile advertising platform, will IPO in the latter half of 2025 (TechCrunch)

• InMobi was India’s first VC-backed $1bn company in 2011, sought $15 billion valuation in a U.S. IPO that was derailed by COVID

• InMobi aims for a $10 bn valuation in Indian IPO and is bullish valuations will rise from there

Policy

Modi to Ease Regulations on State-Owned Companies (BBG)

• The plan would remove the requirement for state-owned companies to seek government permission for investment decisions, easing their ability to negotiate international deals

RBI approves KV Subramanian as CEO & MD of Federal Bank (Economic Times)

• Federal Bank is a private sector and publicly traded bank, however, regulations require the RBI to vet and approve the appointment of private sector leaders

• RBI often directly changes corporate governance rules of private companies, limiting the term of banking CEOs and MDs to 15 years in 2021 (Reuters)

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Oh, and the Indian cultural tradition added to the UNESCO List of Intangible Cultural Heritages of Humanity in 2023 was Garba of Gujarat, which is India’s 15th contribution to the list. Garba is a ritualistic dance done in celebration of the Hindu holiday Navarati.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 83.71 Indian Rupee